Alan Greenspan Doesn’t Want ‘Crazies’ to Undermine the U.S.

Alan Greenspan says this is the worst political and economic environment he’s ever seen.

The 90-year-old former Federal Reserve Chairman spoke about the current presidential election at a conference this week, as reported by Bloomberg, expressing fear about the state of our country and where we’re headed.

Greenspan, who ran the Fed from 1987 to 2006 during the nation’s longest economic boom, said we’re headed toward stagflation—a state of high inflation, high unemployment, and stagnant demand in our economy.

Greenspan said that our country is unstable, adding, “I hope we can all find a way out because this is too great a country to be undermined, by how should I say it, crazies.” He did not specify who exactly those “crazies” are.

“It is the worst economic and political environment that I’ve ever been remotely related to,” Greenspan told his audience. He didn’t appear to be too optimistic about the upcoming election as he added, “Politically, I haven’t a clue how this comes out.”

At this point, it’s anybody’s game. According to poll aggregates, Hillary Clinton is ahead of Donald Trump by just 2.1%, which is within the margin of error.

Did Yellen slay the ‘tech bubble’ dragon?

Just over a decade ago, then U.S. Federal Reserve Board Chair Alan Greenspan told an adoring audience at the American Economic Association that the best way to deal with asset bubbles is to ignore them. Greenspan was relating what he considered to be his success with the 1990s stock bubble. Rather than trying to take steps to keep prices from moving higher before the bubble grew large enough to pose a danger to the economy, he and his colleagues at the Fed decided that the best option was to let it run its course and then pick up the pieces after the bubble burst.

Even back in 2004, there were good reasons to question the wisdom of this approach. The country was enduring what was at the time its longest stretch without net job growth since the Great Depression. This was the reason the Fed was holding the federal funds rate at the extraordinarily low rate of 1.0% more than two years after the 2001 recession had officially ended. But those of us who thought asset bubbles were something the Fed should concern itself with were just a tiny minority of the economics profession.

That changed with the collapse of the housing bubble in 2008. The financial crisis and Great Recession have convinced most economists, including those in top positions at the Fed, that asset bubbles must be taken seriously. This still leaves the question of how best to rein in bubbles.

There are two basic schools of thought. One of these schools believes that the Fed should directly use monetary policy to stem the growth of bubbles. This would mean raising interest rates to bring down asset prices.

While there is little doubt that higher interest rates will eventually quell the growth of a bubble, high interest rates will also slow the economy. In a situation like the present, where the economy needs all the support it can get, using interest rates to stem the growth of a bubble would mean a big loss of jobs output.

The other approach is the use of the Fed’s regulatory powers and its ability to warn the public about the dangers of a bubble. In other words: talk. The use of regulatory authority is straightforward. The Fed can try to restrict the flows of credit that are spurring the growth of a bubble. For example in the case of the housing bubble, publishing mortgage guidelines that would have excluded the worst loans (which it did in the summer of 2008) might have prevented the proliferation of subprime lending.

The talk approach is also fairly simple. The Federal Reserve Board has an enormous megaphone. When the Fed chair testifies before Congress or gives a public address in another forum, the financial sector has to pay attention. If the Fed chair uses this platform to call attention to a bubble, it is likely to have an impact on investor behavior.

This is not a story of having the Fed chair mumble “irrational exuberance,” while giving his or her subjective assessment on asset prices; it is about having the Fed warn of asset prices being out of line with the fundamentals of the market and historical experience, and presenting the evidence to back up this case.

This is exactly what Federal Reserve Board Chair Janet Yellen did in her congressional testimony earlier this month. She warned that the prices of some social media and biotech stocks appeared to be out of line with their earnings potential. She also noted that junk bonds seemed to be over-priced given their inherent riskiness. Her written statement included the evidence to back up these assertions.

No one expects that every investor and fund manager will dump their holdings of these assets based on Yellen’s comments. However they will take the evidence she presents seriously. Any fund manager with a heavy stake in these assets will be looking for a new job if their price subsequently plunges. Unlike with the housing bubble, “who could have known?” will not be an acceptable excuse.

The evidence to date is that Yellen’s warnings had the intended effect. The price of these assets has fallen considerably, although we will need a longer period of time to ensure that the effect is not temporary.

It is certainly encouraging to see Yellen experiment with this approach. It’s good the Fed recognizes its need to prevent the excessive growth of asset bubbles, but it is also important that the Fed carry through this task in a way that doesn’t itself cause serious economic damage. Providing information to financial markets is the lowest cost path imaginable to bubble containment. We should all hope that it works.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

Will allowing more foreign workers shrink the salary gap?

Those looking to assign blame for income inequality in the U.S. have no shortage of institutions to cast as villains. The left’s perennial bad guy is Wal-Mart, most recently targeted by union leaders demanding that its new Washington, D.C., box stores pay 50% above the minimum wage (labor lost that battle). On the political right the culprit is often the Latino illegal immigrant, who stands accused of taking Americans’ jobs and keeping wages low by working off the books. And just about everyone cringes at CEO salaries that average 273 times that of their employees.

The policy prescriptions are just as familiar as the villains’ names: Raise wages at the bottom. Raise taxes at the top. To those old debates, Alan Greenspan offers up a provocative new idea: Let firms recruit as many brainy foreign employees to American soil as they want. In other words, instead of raising the cap on specialty green cards and H-1B visas, as the Senate-passed immigration bill does, drop the limits altogether.

The result? The former Fed chair argues that the subsequent crush of high-skilled foreign talent would squeeze salaries at the top. (That’s probably you, Fortune reader.) “They’d be competing for jobs against us — the well educated and high skilled,” he says. “Including me. I don’t know how many economists, but there would be some [foreign hires].” And there would be a bonus for lower-income workers: This infusion of talent would boost economic growth — and more jobs.

The demand for H-1B visas is huge and growing. Within days visas for 65,000, plus 20,000 advanced-degree holders, are filled each year, even with a regulatory stipulation that they can be granted only for jobs “so specialized and complex that the knowledge required to perform the duties is usually associated with the attainment of a bachelor’s or higher degree.” (Companies have to attest that none of their U.S. employees will be displaced, but they don’t have to prove that no other Americans are available.)

Loads of those visa applications come on behalf of foreign graduates and postgraduates from U.S. universities who otherwise will take their degrees home to compete against American firms. Last year a record 800,000 foreign students attended U.S. universities, and many study science or business. If the gates were open to more of those students, “they’d force prices and income down in the upper-income groups,” Greenspan tells me. “Not by a large amount, but it would be measurable.”

I’ve argued here that giving U.S. companies more leeway to hire foreigners reduces their incentive to invest in the skills and education of the American workforce. If Microsoft can pull all the employees it wants out from the Indians and Chinese and Brazilians populating Ivy League corridors, why bother investing in U.S. schools?

Greenspan, author of the new book The Map and the Territory, counters that there is no cause and effect on this score. Indeed, even with lower H-1B caps in place, the U.S. education system has stalled. A troubling OECD report released in November showed our 15-year-olds stuck far behind students in other developed countries in math, science, and reading. Despite outspending almost every other country, the U.S. came in 26th (out of 34 countries) in math and 21st in science. “Companies would love to train them, but the students who come out of American high schools are much lower quality than they used to be,” says Greenspan.

America’s widening income gap is the result of a complex stew of globalization, people-replacing technologies, and slowing educational attainment from the middle class on down. Toss into that stew other ingredients — like the huge salary premium granted to college grads, and the fact that a growing majority of low-income kids are born to single mothers and will struggle more. Greenspan’s idea can’t reverse any of that. But it does serve as a reminder that after 30 years of a widening income gap, we should consider thinking outside the usual boxes.